Monday, November 06, 2006

Smart Solutions for Global Warming

From geothermal to biomass, Israeli energy pioneer Ormat Industries is advancing alternative and renewable energies around the world by Neal Sandler A Mideast nation with no oil of its own, Israel is increasingly tapping into a different kind of resource—the inventiveness and persistence of its scientists and entrepreneurs. From shale oil to solar power, Israeli companies are becoming world leaders in alternative energy, exporting their technology to customers worldwide while at the same time reducing Israel's dependence on costly oil imports. It's a good time to be pushing into renewables. As concerns mount over hydrocarbon-induced global warming, interest is surging in non-polluting energy sources. On Oct. 30, British Prime Minister Tony Blair, for instance, released a comprehensive new report on global warming and warned that the consequences of failing to act "are literally disastrous." At the same time, oil prices are near historically high levels, which makes alternatives more cost-competitive.

One of Israel's mostly unlikely success stories, given the lack of local geysers, is Yavne-based Ormat Industries (ORA), which has become a global leader in geothermal energy. Founded in 1965 by Lucien and Yehudit Bronicki, a husband-and-wife team who now serve, respectively, as chairman and CEO, Ormat booked revenues of $257 million in 2005 and has a market capitalization of more than $1.3 billion.

Plant Growth

Ormat's Nasdaq-traded shares have more than tripled since the company listed in the U.S. two years ago. "Ormat is one of the hottest renewable energy companies on Wall Street," says Len Rosen, Lehman Brothers country head for Israel. Even after that run-up, brokerage UBS issued a report in mid-October saying the stock was still trading at a substantial discount. Why the excitement? Much of Ormat's success owes to a breakthrough turbine design developed by the Bronickis that permits renewable energy sources such as geothermal or solar-heated steam to be converted into electricity more efficiently. After decades of selling turbines alone, Ormat in the mid 1990s started building geothermal plants of its own around the world that use its super-efficient turbine technology.

The company now operates 11 plants in five countries, including facilities in California, Nevada, and Hawaii, that collectively produce some 360 megawatts of power—enough to power a city of about 500,000 people. Ormat sells the power generated at these plants to local utilities and books a tidy profit. Net earnings in 2005 reached $15.2 million, or 5.9% of revenues—and topped 12.25% of revenues in this year's first half.

Heat Recycling

Of even greater interest to investors, Ormat and two partners—Japan's Itochu and Indonesia's Medco Energi International—won a tender in July to construct a new 340 megawatt geothermal power project on the island of Sumatra, the largest such facility in history. This and other expansion plans will boost the company's production capacity 80% by the end of 2008.

Ormat turbines also help wring more power out of conventional energy sources. At gas-fired electricity plants in North and South Dakota, the company has installed systems that recover heat normally "wasted" in production and convert it into additional electricity. Similar projects are under construction in Washington State and Canada. Ormat's "recovered energy power generation" business earned $9.2 million in revenues the first six months of this year, up from less than $1 million a year earlier.

Now, the company is branching out into related fields. In the early 1990s, Ormat developed a technology for producing oil from shale. But with oil prices low at the time, the Israeli government was unwilling to back an ambitious project to develop the country's huge shale reserves (see BusinessWeek.com, 7/5/06, "Israel Presses for Oil from Shale").

Fuel Farmers

Now, Ormat has adapted the technology for use in the tar sands of Canada's Alberta province, where it's being used in a project run by Opti Canada set to begin production this year. Ormat has a 7.6% stake in the publicly traded Canadian company.

In September, Ormat went even further afield, announcing its aim to commercialize a new 100% plant-based biodiesel fuel being developed with an as-yet-undisclosed local academic institution. "The trick to remaining competitive is to focus on plants that have high yields and that are not used as food," says Bronicki.

Ormat will invest $60 million over the next three years in the project. If it's successful, the Bronickis thinks Africa and other places could allocate large tracts of land to grow fuel-producing plants. Sounds grandiose—but then, dreaming big helped the Bronickis keep Ormat alive through decades of struggle. French-born Lucien developed the original turbine with the aim of tapping into renewable energy sources in remote areas. Unlike rival offerings of the time, which tended to be small and unproductive, Bronicki's more efficient turbine could generate up to 10 megawatts of power.

Letting Off Steam

In the late 1970s, Lucien Bronicki wasn't able to persuade the Israeli government to fund an ambitious solar-energy project using Ormat's turbines. So Bronicki set his sights instead on geothermal, which harnesses steam, heat, or hot water from geysers or hot springs on the earth's surface to produce electricity. Well known in locales such as Iceland and the Philippines, geothermal is now growing in the U.S., Guatemala, Kenya, and other countries thanks to high oil prices and environmental concerns.

Geothermal's great advantage over other renewables such as solar and wind power is that it isn't dependent on the elements, and produces continuous power. Indeed, many geothermal projects are already competitive with plants run on fossil fuels. The big drawback is that geothermal plants tend to be small. Depending on the strength of the natural source, they're usually no more than 100 megawatts in capacity.

Still, there's enormous opportunity. "We've only scratched the surface," says Ormat CEO Yehudit Bronicki. Worldwide, geothermal plants now produce 8,900 megawatts of power, or about enough to supply a midsized U.S. state such as New Jersey. The known potential is at least eight times greater, or 72,000 megawatts, she adds, "and with additional research and development the figure could be nearly double." The U.S. and Indonesia are among the countries with the largest geothermal potential.

Ready to Burn

Prospects are less clear for Ormat's detour into biodiesel. Most biomass fuels today are made from a mixture of conventional diesel and vegetable oils, most commonly soy and canola. One challenge facing Ormat's quest for a non-edible oil alternative is to develop a product that can be used without adapting car engines.

"If they're successful this could prove to be a major source of income for the company in the years to come," predicts Yuval Zaira, an analyst at Israel Brokerage Investment, a Tel Aviv-based investment bank.

After decades of fighting an uphill battle for acceptance, the Bronickis believe renewable energy is finally here to stay. It's not just because of higher oil prices but also the rising concern over global warming. "Only if oil prices plunge to $12 a barrel will people reconsider whether renewable energy is worth the current premium," says Lucien Bronicki. It hasn't been an easy climb, but at least nowadays there's no struggle for recognition.